OECD Secretary-General

Financing for investment

The economic recovery is slowly gathering pace. Yet, rates of investment have been falling over the past decade and in many advanced countries are at historically low levels.

There are many possible reasons for the lack of investment. The combination of lingering economic uncertainty and depressed interest rates valuations has led many companies to hoard cash and increase leverage. But rather than using this extra cash for investment, companies are paying out higher dividends and buying-back shares. Buy-backs are at record highs in many countries. Corporate investment, on the other hand, is at record lows.

As monetary policies return to a more normal path, we may expect this situation to gradually unravel. However, banks’ capacity to finance long-term investment projects will not be the same in the future. Stronger regulations are being developed to prevent financial crisis. One of the effects of these regulations will be for banks to better match the maturities of their assets and liabilities. Some withdrawal from long-term investment financing is inevitable and is in fact already happening.

This withdrawal raises concerns we have to address. We know that infrastructure investment needs are already significant and will continue to rise in coming years. Infrastructure performs a vital role for the functioning of the economy and for increasing social welfare. “Greening” growth, will also require further additional investments. Large scale private sector engagement will be essential to spur the transition to a low-carbon economy. The OECD has developed Policy Guidance for Investment in Clean Energy Infrastructure as well as a useful case study analysis of the role of institutional investors in financing green infrastructure; that we both provided to you.

With their more than USD 85 trillion in assets under management, there is a major potential role for investors such as pension funds, insurers, mutual funds and sovereign wealth funds in providing financing for long-term investment. Yet, currently, portfolio allocations to long-term assets such as infrastructure are currently at very low levels, around 1% of total assets on average in the case of pension funds.

The recent OECD pension fund survey shows that while there is a growing interest by pension funds managers for infrastructure investment, the level of such investment by pension funds continues to be low in most countries, with some exceptions. Several Canadian and Australian pension funds for instance invest as much as 10% of their assets in infrastructure projects. The situation is similar for public pension funds. This confirms the relevance of addressing the obstacles which prevent pension funds to invest more in long term projects. There is a huge potential here.

The endorsement of the G20/OECD High-Level Principles on Long-Term Investment Financing by Institutional Investors has been a major step to unlock this potential. The Principles identify the key policy and market challenges that we still face to facilitate a much-needed change in investment flows. The key word here is to facilitate, that is, to create the right policy and institutional environment for these giants of finance to play a more direct role in the financing of productive activities in the economy, so to have a “productive” growth. As requested by the Leaders, the G20/OECD Task Force on institutional investors and long term financing will now assist you, ministers and governors, in developing effective approaches to facilitate the implementation of these principles.

Addressing the constraints to long-term investment will have to take into consideration country-specific factors that relate to the quality of the investment climate. As you mandated us, we will in this respect provide you next year with a major analysis of governmental and market based incentives to stimulate long term investment. The high-level principles address these broader policy preconditions for long-term investment, and are complemented with other OECD inputs to the G20 agenda which focus more particularly on host-states’ investment environment, including a report addressing policy impediments to infrastructure investment. The OECD congratulate Russia for putting these issues high on the G20 agenda and most welcome the decision by Australia to continue to do so. We stand ready to continue to actively assist the G20 on these matters as well as others.